Investor · Boston MA · Member since 2015 · 50 posts · 18 votes
Hi everyone :)
I have been doing some research on investing in out of state properties. However, after reading and factoring all the hassles and risks of investing long distances and knowing that there are investments out there that are completely passive and yield a standard 7 to 10% returns, now I am wondering if it's worth it to invest in out of state at all.
For newbies, I think a lot of people on this forum recommend to start with turnkey properties. When I looked at some of the TK websites, the properties they featured are generating around 8 to 9% on average. If that's the case, are there any upsides of investing out of state instead of just doing passive investments like Multiple Equity, Crowd Street etc? Or am I missing something?
I know that you can probably get a higher returns if you assembly your own out of state teams and get some off market deals. But what is the ROI for doing that vs. investing in TK? Is the return significantly enough comparing to the risk and work you take.
Would appreciate your thoughts and want to hear your stories about investing in out of state vs. passive investing in funds and notes. Thank you all in advance!
@Sara W.: asking if investing OOS is "worth it" is like asking a room full of hungry first graders what snack they want - you'll get unlimited and diverse responses, and each response will be genuine, well-intentioned, and vehement. Same with OOS investors; based upon each investor's location, experience, capital and risk tolerance, you'll get a smorgasbord of feedback.
Unsure if it helps, but instead of asking if the best play is OOS, TK or whatever, ask yourself how much of your life you want to dedicate to managing your assets and what amount of money is worth it to you to delegate that management - then reverse engineer that play.
@Sara W.: asking if investing OOS is "worth it" is like asking a room full of hungry first graders what snack they want - you'll get unlimited and diverse responses, and each response will be genuine, well-intentioned, and vehement. Same with OOS investors; based upon each investor's location, experience, capital and risk tolerance, you'll get a smorgasbord of feedback.
Unsure if it helps, but instead of asking if the best play is OOS, TK or whatever, ask yourself how much of your life you want to dedicate to managing your assets and what amount of money is worth it to you to delegate that management - then reverse engineer that play.
@Simone G. Best response I've heard all year. @Sara W. Everyone has a different definition of "worth it". I thin what Simone said was gold. Think about your goals and how you are going to achieve them. I'm in CA and I love investing OOS, it is 100% "worth it" for me. Is it for you? Question for you!
Here is how I evaluate each investor's true interest in OOS investing. Do you want to make passive income or do you want to learn about investing in real estate? If your answer is the first one, invest in index funds and call it a day. Or buy boring turnkey investments that don't appreciate and cashflow a trickle. If you want to learn about investing in real estate, focus local to start and consider OOS when your two-hour radius is all too expensive or you have other areas where you have dedicated and trusted people who could help you build a local team. They way I do this is by starting at every town I've ever lived in, where I went to college or graduate school, where my best friends and family live - are any of those good investment markets or better than where you live? If so, would they be reliable in terms of seeing some houses and taking photos, etc. Could one be a partner? Too many people look to OOS because they think their market is too hot or too high or because they are too scared to actually do it in person. I can tell you, without any question at all, if you are evaluating OOS investing on a percentage yield, don't do it.
@Sara W. For 8-9% absolutely not I could play darts with an MLS listings sheet in most markets and blow that out of the water. (Assuming leverage is allowed) honestly if you are not getting at least 20% IRR on a relatively passive investment with a property manager than you are not getting a good deal. Both the LTR's I have out of state with a property manager and the properties I manages for STR's for others after our costs are above 20% a year if the property is leveraged. I don't know Boston but I bet you could find a 20% in your area also. When I say leverage I mean around 75% LTV even higher returns with 90% LTV vacation home loans or 95%+ house hacking loans.
Don't underestimate driving just a few hours outside your MSA for a much different real estate market - a couple hours outside most MSAs you can start seeing properties start to cash flow much better. That said, I and many other shave started out of state investing for higher cash flowing markets and I think it's a great way to start as a safe investment.
@Simone G.@Lee RipmaThank you for your response! I absolutely agree that my definition of "worth it" is different from others', and I will be getting many different feedback and opinions from people. But that's exactly what I am looking for. I don't know what I don't know. So I want to see what people's experiences are like and what strategies that they use that work and don't work well for them, so I can do my own assessment.
As mentioned in my question, I checked out some of the turnkey solutions that other BP investors recommended, I calculated the ROI of some of the properties on the site, and compared that to my own portfolio of passive RE investments, and I don't see much of a difference. That's why I am wondering what prompts others to use a TK solution when they can invest in other RE funds or RE notes that can get them the same return but without the work or risks of owning an OOS property. I simply want to know and see if I am missing something. Maybe there are other upsides that I don't know of that other investors see in TK solution over passive RE investment.
And for those that don't use TK solutions, how do they go about getting a high ROI investing in OOS properties? I know that some investors build up an OOS team over the years that they can rely on, so I want to know what ROI they have been getting and how much work they put in and how involved they are with their OOS properties.
So even though there's no universal definition of "worth it" but the effort/risk you take should be on par with the return/benefit you get. I am curious of learning what amount of effort and risk you have put in vs the returns/benefits that you have been getting to make the OOS investing worthwhile to you.
@Lee Ripma, you mentioned that OOS is "worth it" to you. I am assuming that you don't use a TK solution and you see a much higher return than any other passive investment vehicles out there. Do you mind sharing your experience/strategy of OOS investing, the ROI you are getting, which market you are investing in, and why you think OOS is worth it to you (much higher ROI than other passive investments out there, property appreciation, more control than passively investing in a fund or a note?)
@Zachary Beach, thank you for sharing your IRR and good to know that this is what people can expect of from OOS properties. Do you mind sharing which market do you invest in, and what strategies you use to get this high IRR? Also, how much work did you put in initially, and how involved are you still?
I started out investing in an area that's close to Boston and it happened to be where I grew up in. I got very lucky with this property as I got in when the market was at its bottom. Then I got into another up and coming area near Boston when it was still low and that one worked very well for me as well. But Boston and its surrounding market has been getting very hot over the years, the ROI just doesn't make any more sense to me. That's why I am searching for other alternative options like OOS.
I did think about properties within a 2 to 3 hours ride from where I live, but there are a couple of reasons why I stopped. The areas that I am interested in have gone up in value so the ROI for rental is not significantly better. I can't leverage my existing team now because they don't service those areas and I don't know anyone who live around the areas, so I would have to assembly a new team anyway. But what makes me want to look out of state is the fact that MA is very tenant friendly. And the areas with high ROI tend to be ones that are in the B- to C+ neighborhoods. I almost had an experience of having to evict someone for nonpayment, and the process was painful. So if I had a choice I would want to go somewhere that's more landlord friendly.
@Sara W. - I was on the BP podcast and I talk all about how I invest in Kansas City from CA. No, I don't buy TK. I think the big upside in RE is the ability to force appreciation, so I really have achieved very high IRRs doing that. However, I am not a one-trick pony. I invest in a lot of different ways. I have a value add multifamily portfolio out of state, I invest in companies, I invest in a software product I'm developing to make location due diligence easier for out of state investors, I still buy stocks, AND I invest passively in my own real estate syndications and other peoples syndications.
When people see my returns sometimes they want them, but then I remind them how NOT PASSIVE they really are. The more I've done my own deals and realize the work that goes into it the more I'm quite happy to be passive. So I would suggest thinking about how active or passive you want to be!
I invest OOS and I know it's not for everyone. Are you high level operator or do you expect everyone to do everything up your own standard? Can you see things through, solve problems as they arise, turn a loss into an education, stay vigilant, trust people but not let others make a fool out of you, have enough cash, tech savvy? The people that can do OOS successfully are people that can operate on a high level yet obsessive over deals, analysis, cash flow, financing, people management etc... I find it hard to explain but if you can understand 25% of my jibberish I think you'll my point. My bad.
It is difficult. I am in Milwaukee and an agent and long time investor and coach - I get several requests every week and I can usually tell quickly if they are willing to do what it takes. Most do not, the market has gotten so competitive in Milwaukee. As an OOS investor you are competing against many first time home buyers, many have made offers before and got bid out. And you are competing with local investors. So you have to be willing to beat both. And on top of that you carry a overhead cost burden, because doing things remotely comes with additional expenses. Buying a crappy property that nobody locally wanted is also not a good solution, buying quality is even more imprtant when you are remote!
The combination that I have seen succesful is someone who is working in one of the most expensive areas and earn a very high W2 and a very strong resolve to buy a property. The economic delta is big enough to overcome the long distance burden. Someone with a smaller economic delta will ultimatly give up, because it does not make sense - for example: Milwaukee is better than Chicago and its less than 2hrs away, but the difference in property value, rents and incoem level is not sufficient to make up for the difficulties and extra cost.
One of the key things that I did was start without a PM back in 2008. That saved quite a bit of cash flow that I needed to scale. Later one as we grew we brought on a young part time guy who works for me and handles the day to day PM. But if I would have started remote, I would have had to work with a PM from day one, slowing down my growth. I believe there is opportunity in every State, you may have to choose a different strategy. Or move - we are getting a lot of relocation clients since the start of covid!
@Sara W. - I was on the BP podcast and I talk all about how I invest in Kansas City from CA. No, I don't buy TK. I think the big upside in RE is the ability to force appreciation, so I really have achieved very high IRRs doing that. However, I am not a one-trick pony. I invest in a lot of different ways. I have a value add multifamily portfolio out of state, I invest in companies, I invest in a software product I'm developing to make location due diligence easier for out of state investors, I still buy stocks, AND I invest passively in my own real estate syndications and other peoples syndications.
When people see my returns sometimes they want them, but then I remind them how NOT PASSIVE they really are. The more I've done my own deals and realize the work that goes into it the more I'm quite happy to be passive. So I would suggest thinking about how active or passive you want to be!
Thank you, Lee! Will definitely listen to the podcast! Thank you for sharing your experience. I am not looking to be very actively involved at the moment. So I want to understand how much work there is to invest in OOS without using a TK solution.
I invest OOS and I know it's not for everyone. Are you high level operator or do you expect everyone to do everything up your own standard? Can you see things through, solve problems as they arise, turn a loss into an education, stay vigilant, trust people but not let others make a fool out of you, have enough cash, tech savvy? The people that can do OOS successfully are people that can operate on a high level yet obsessive over deals, analysis, cash flow, financing, people management etc... I find it hard to explain but if you can understand 25% of my jibberish I think you'll my point. My bad.
Thank you, Allen! Totally understand that, think like everything else in life, you will need to actually experience it in order to learn. I saw that you invest in KS. How long have you been investing in the area and what is your experience like so far?
It is difficult. I am in Milwaukee and an agent and long time investor and coach - I get several requests every week and I can usually tell quickly if they are willing to do what it takes. Most do not, the market has gotten so competitive in Milwaukee. As an OOS investor you are competing against many first time home buyers, many have made offers before and got bid out. And you are competing with local investors. So you have to be willing to beat both. And on top of that you carry a overhead cost burden, because doing things remotely comes with additional expenses. Buying a crappy property that nobody locally wanted is also not a good solution, buying quality is even more imprtant when you are remote!
The combination that I have seen succesful is someone who is working in one of the most expensive areas and earn a very high W2 and a very strong resolve to buy a property. The economic delta is big enough to overcome the long distance burden. Someone with a smaller economic delta will ultimatly give up, because it does not make sense - for example: Milwaukee is better than Chicago and its less than 2hrs away, but the difference in property value, rents and incoem level is not sufficient to make up for the difficulties and extra cost.
One of the key things that I did was start without a PM back in 2008. That saved quite a bit of cash flow that I needed to scale. Later one as we grew we brought on a young part time guy who works for me and handles the day to day PM. But if I would have started remote, I would have had to work with a PM from day one, slowing down my growth. I believe there is opportunity in every State, you may have to choose a different strategy. Or move - we are getting a lot of relocation clients since the start of covid!
Thank you Marcus for sharing your experience and for your honest feedback. I have been investing locally around Boston and I didn't use a PM. I agree with you, this allows me to generate a higher cash flow so I can grow quicker. Now I have a couple of handyman and contractors that I have built relationship over the years and I can pretty much be hands-off now. But everything takes time. It took me a good solid two years for my most recent property to be stable - getting rid of bad tenants, renovating, and raising rents to market rates. One of the biggest challenge I see now is to find a reputable PM from out of state that can help me to manage the property, but this will mean that I need to get a very good deal on the property in order to get a high enough return that makes sense. And as you mention it's getting a lot more difficult to do now with the whole COVID situation. Another riskier approach is to self manage the property remotely initially and to find and dispatch handyman and contractors when needed. Have you seen anyone who have successfully done it before?
@Sara W. I invest in 3 states and Canada. I like KS because the property values are far cheaper so from a cash flow perspective it's better. I also think historically economically depressed cities like Wichita (airplane manufacturing) should catch up as more and more cash moves into REI which is something that has happened. Last year Wichita's appreciation was in the top 25% of top 100 US metropolitan areas, I believe mostly from OOS investors. Also the tenant base are better than tenants that I find in other cities that cap around the same rate as Wichita, so I save some headaches in the long run.
@Sara W. Last year Wichita's appreciation was in the top 25% of top 100 US metropolitan areas, I believe mostly from OOS investors.
This is what will lead to a crash -- the exuberance everywhere has been seeing Wichita included-- we're in for a rude awakening - I hate to say I look forward to it - as then I'll be able to get my house built and a contractor to take me seriously and not try to screw me over when they dont have any work. Though the one thing that feels different about this runup is that contractors and home builders I dont think are as stretched thin financially as they were back in 06-08ish.
Same thing happened in Florida before the bubble - a monkey could have sold real estate and made money in RE -- same as now -- the cycle is doomed to repeat itself.
@Sara W. I invest in 3 states and Canada. I like KS because the property values are far cheaper so from a cash flow perspective it's better. I also think historically economically depressed cities like Wichita (airplane manufacturing) should catch up as more and more cash moves into REI which is something that has happened. Last year Wichita's appreciation was in the top 25% of top 100 US metropolitan areas, I believe mostly from OOS investors. Also the tenant base are better than tenants that I find in other cities that cap around the same rate as Wichita, so I save some headaches in the long run.
Thank you, Allen! Good to know! So do you manage the property using a PM, and what do you see as your ROI over the years? And how do you ensure the property is in good condition? Did you hire a third party inspector before the purchase and require your PM to check on the property every 6 months or so to make sure there is no major issues? Thank you!
It is difficult. I am in Milwaukee and an agent and long time investor and coach - I get several requests every week and I can usually tell quickly if they are willing to do what it takes. Most do not, the market has gotten so competitive in Milwaukee. As an OOS investor you are competing against many first time home buyers, many have made offers before and got bid out. And you are competing with local investors. So you have to be willing to beat both. And on top of that you carry a overhead cost burden, because doing things remotely comes with additional expenses. Buying a crappy property that nobody locally wanted is also not a good solution, buying quality is even more imprtant when you are remote!
The combination that I have seen succesful is someone who is working in one of the most expensive areas and earn a very high W2 and a very strong resolve to buy a property. The economic delta is big enough to overcome the long distance burden. Someone with a smaller economic delta will ultimatly give up, because it does not make sense - for example: Milwaukee is better than Chicago and its less than 2hrs away, but the difference in property value, rents and incoem level is not sufficient to make up for the difficulties and extra cost.
One of the key things that I did was start without a PM back in 2008. That saved quite a bit of cash flow that I needed to scale. Later one as we grew we brought on a young part time guy who works for me and handles the day to day PM. But if I would have started remote, I would have had to work with a PM from day one, slowing down my growth. I believe there is opportunity in every State, you may have to choose a different strategy. Or move - we are getting a lot of relocation clients since the start of covid!
Thank you Marcus for sharing your experience and for your honest feedback. I have been investing locally around Boston and I didn't use a PM. I agree with you, this allows me to generate a higher cash flow so I can grow quicker. Now I have a couple of handyman and contractors that I have built relationship over the years and I can pretty much be hands-off now. But everything takes time. It took me a good solid two years for my most recent property to be stable - getting rid of bad tenants, renovating, and raising rents to market rates. One of the biggest challenge I see now is to find a reputable PM from out of state that can help me to manage the property, but this will mean that I need to get a very good deal on the property in order to get a high enough return that makes sense. And as you mention it's getting a lot more difficult to do now with the whole COVID situation. Another riskier approach is to self manage the property remotely initially and to find and dispatch handyman and contractors when needed. Have you seen anyone who have successfully done it before?
A great PM is key! People on BP are always looking for the BEST state to invest in. I would say where you invest does not matter as much as the team you have there! And if you have a good team, stick with it and give it more biz, and don't try to rebuild another team in another State.
@Sara W. Last year Wichita's appreciation was in the top 25% of top 100 US metropolitan areas, I believe mostly from OOS investors.
This is what will lead to a crash -- the exuberance everywhere has been seeing Wichita included-- we're in for a rude awakening - I hate to say I look forward to it - as then I'll be able to get my house built and a contractor to take me seriously and not try to screw me over when they dont have any work. Though the one thing that feels different about this runup is that contractors and home builders I dont think are as stretched thin financially as they were back in 06-08ish.
Same thing happened in Florida before the bubble - a monkey could have sold real estate and made money in RE -- same as now -- the cycle is doomed to repeat itself.
I spend a lot of time looking at trends and data and as much as I am looking for the clouds on the horizon I don't see any. Three things are different this time vs 2007: the demand is real and growing - 63 million Millennials have finally started buying houses. The oldest are 38 years now! Number two: we have a supply shortage. Building has been down for a decade, we are in the hole. Number three: the financial picture looks different: lending is conservative, affordability is very good compared to 2007, prices have room to grow.
The other thing is that I don't believe contractors are out to screw you. Well, most anyways, there are always some rotten apples. Just kick the guy to the curb and work with someone else. But if you are waiting for a down turn you might be waiting a many years. I'd maybe wait until lumber is comming down a bit, but don't delay. Interest rates are in your favor.
@Sara W. I invest near Boise Idaho and big bear CA which is a lake town and the closest ski resorts to LA, San Diego and Las Vegas. Idaho units are managed by a management company that was recommended by family that use them so it wasn’t much work just buying and setting up auto pay and getting paid. The properties I have in Big Bear are brrrr’s that I Use as short term rentals so not passive at all but the people we manage for it is passive for them they just buy and set up auto pay and get paid. We even offer furnishings services for the properties so that they are staged nicely as well as Search engine optimization for the listings so the are top performers in the algorithms so we can get the properties to perform optimally.
@Sara W. With OOS investing, depending on strategy, your returns can be greater than 8-9% if you factor in a long term hold and appreciation on top of your cash flow.
Turnkey rentals usually have tight margins, and I don't recommend those to newbie investors. Sure it is easier, but it's not necessarily the best ROI. It's entirely dependent on the comfort level for the investor, and like others have said, it depends on what makes sense for you personally.
I have investors who have no interest in doing rehabs or even owning properties. They would much rather invest in notes for what they consider a "safer" investment. It's very customized to the person and the goals.
I'm sorry - I disagree - this amount of housing inflation is unsustainable. And when contractors are trying to charge me a premium vs what I know builders pay to build a house they are out for a payday and I wont succumb to that. ***I'll clarify - I designed my own house - cleared the land where I wanted the house built - picked out all furnishings - was going to buy all supplies, have my own accounts, have done other construction projects - I'm not the typical green horn - yes I'm getting screwed if someone wants to charge a premium on their work and treat me as some yuppy typical needing client - all they have to do is show up and do the work - we've got it all figured out - so no I wont pay a premium for someone to do even less work and put in even less time that is usual. In Topeka with our business we struggle to get peopel to show up to do anything - we live in a very weird part of the state - people do not like to work here in general -- I do not know why.
The day will come soon that they wont be having people banging on their door for work. We cant have the largest economy shut down for this many months, a president on a hell bent mission to raise the price of energy via taxation and outlawing the production of certain vehicles and create a whole BS climate industry built around smoke and mirrors. The flood gates will open - it's a matter of when -- this many people can't have been out of work and barely surviving without any sort of adjustment. Not to mention one of the biggest cash infusions set to hit the economy ever soon if they pass the handout bill.
How many posts do you see on this very RE board of everyone wanting to invest in rentals, do flips etc as they see people making money on tv -- I dunno - there are things about this cycle that are different as you pointed out - but there's a point where affordability gets out of reach and doesnt make sense.
All you coasters and big city folks can keep your money there - you ran up your markets to unsustainable levels - dont bring your crash to the midwest - I dont want to see that here. The same type of crap happened in S Florida when I lived there during the bubble/crash - literally everyone was attempting to flip homes, make money in RE -- as the old wisdom goes when your hair stylist, taxi driver or whatever is starting to talk about some sort of investment that's when you should approach w caution or get out.
I just put 3 more under contract so I'm not heeding my own advice of getting out but they fit my affordability factor and the rents are there too.
I found this article rather fitting for this discussion - I'm the local with the stance of the Idahoans in this article - so I guess it depends on perspective - rising prices is a curse and a blessing.
We have so many dead towns in KS and across the great plains with some awesome old houses and good people - Maybe if anything this next revolution will get people back to small towns and help revive them -- So hopeful Elon Musk's Starlink internet service and perhaps an incentive from the govt along with a new attitude that Work from home or anywhere for that matter can be good for a businesses bottom line and morale - maybe the winds of change could help seed a rebirth in rural America.
Out of state investing can be very profitable, but you need to have a strong local team wherever you invest which is comprised of an agent, property manager, lender, and contractor.
Turnkey providers can be good but sometimes they’ll sell you overpriced assets that are not fully turnkey and then drop the ball on management. Versus the route of using multiple separate entities to manage your asset buying process (agent, property manager, lender, contractor).
Invest where you are comfortable and have “ working” knowledge. Most out of state investors end up becoming absentee owners who want out of their situation. Because what sounds great on a forum, become nightmares to many.
I recall when these type forums were touting Michigan (Detroit) as a great place to invest. And I know a number of people—from Arizona and California—-that acted on that information. Most did well. But they were the ones with either working knowledge of that area or friends/family from that area. Those that were following the crowd got burnt.
The issues they faced from bursting water lines, heating units failing, extreme wear/tear on roofs etc. issues they had never experienced in their locales. Caused them more headaches than the property was worth (cashflow, appreciation).
All of these investors loss more money than they could have made by being patient and investing where they lived.
I would say the benefit is year 5 versus year one. Absolutely through syndications and other means you can hit 8-12% a year in returns and when you are looking at buying properties it seems as if you are doing a lot more work for the same return, so why do it? Because you are not buying a property for its year 1 return. You are buying it for its year 5, 10, 15, even 20 year return. Don't get me wrong you don't want to buy a bad deal, and you don't want to buy and just bank on appreciation, but often that okay deal year 1 will be a great deal in 5 years.
Easy example is the house I bought 2 years ago, 2 years ago it was a fine deal not bad, not good, just a base it. Now it has appreciated about 33%. If anyone could buy my house for what I bought it for 2 years ago they would in a heart beat. So the reason you go through the trouble is because of the long term benefits. Hope that helps.
